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Franchise Prospector » Money & Financing
How to Research Rates of Return
Money & Financing
When it comes to investing in a franchise, the process of estimating the right is often much more difficult than it seems. Most of the time, investors will find that either the franchisors are reluctant to come up with this information or that the projections vary widely from between franchises. Right away, a great number of entrepreneurs are caught short by the lack of information available to work with, and many end up having more questions than they had set out with initially.
What if I buy a franchise in the mall? What percentage return will I get from investing in a cleaning franchise as opposed to a restaurant? What's a UFOC form? Why won't the company just tell me what rate of return I can expect?
In order to answer all of these questions and more, it is important for the prospective franchisee to develop a basic understanding of the nature of franchising. It is an incredibly popular business model that encompasses dozens of completely unrelated industries. Whether one is interested in buying a cleaning service or a burger stand, a tax accounting outfit or an ice cream parlor, chances are that there will be a number of different franchise companies competing for the sale. Even within the companies themselves there is often a wide variance in the potential structure of the store - mall stand, multiple units, etc. - that can affect the investment amount and how it relates to cash flow. All these factors make it virtually impossible to find a quick answer to the question of return rates available to someone who is thinking of running a franchise.
Indeed, while the process of getting a reliable rate-of-return numbers would first depend on which industry were being looked into, the business structure, the amount of the investment and a variety of other key factors that need to be considered, it is hard to pin down exact statistics. In the past it was far more common for companies to boast - at every chance they got - the better rates that franchises could yield as opposed conventional businesses. Today, however, this practice has become rather questionable due to the essential inaccuracy of the majority of such claims.
Although finding out about rates of return for a franchise can seem like piecing together a complicated jigsaw puzzle, it is a necessary component of the franchise purchasing process that must be undertaken. For those who are intent upon getting the best rate of return, there are specific avenues of investigation that it is important to pursue. First off, one method used to obtain a fairly reliable estimate of projected earnings is found by requesting this information from the franchisor itself. While many investors may be faced with reluctance on the part of the company, everybody who asks should be provided with the Uniform Franchise Offering Circular (UFOC). Upon receiving this packet, take a look at the information found on item 19. Should the company have decided to provide the figures here, this would show the estimated earnings of a franchise which can then be calculated against the proposed investment amount to determine the rate of return. Unfortunately, many companies don't bother going through the extra hassle it takes to come up with these numbers. Combined with the fact that strict guidelines prevent franchisors from sexing up these figures, nearly three quarters of franchising companies will not include this information.
Nevertheless, this packet can be quite helpful for those seeking more information about a franchise's potential rate of return. Looking beyond item 19, there is a lot of crucial financial data that can be pulled from the UFOC. The included statements reporting financial information pertaining to all other franchisees under the company's umbrella is a good place to start. In addition, there is the estimated investment amount, as well as how, exactly, the franchisor takes its cut of your business' revenue (i.e. is it through flat percentage or is it based on performance?) Indeed, the UFOC includes plenty of information necessary to bring the investor closer to making a wise franchise choice.
One last piece of information found in the packet, however, is possibly the most useful; it's a list of all the company's franchisees, past and present, as well as the best way to get in touch with them. Call them up and find out how the official figures compare to the situation on the ground. Having covered all the bases, an entrepreneur should be better prepared to make a final decision.
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